DEUTSCHE BANK: A major financial crisis is almost twice as likely in China as anywhere else in the world

Staff members of a real estate developer pile up bundles of 100 yuan banknotes during a ceremony to give salaries to their construction workers, in Luoyang, Henan province, China, January 9, 2016. The developer gave away 20 million yuan ($3.05 million) in salaries to its workers on Saturday, according to local media.
REUTERS/Stringer

Deutsche Bank argues that China is almost twice as likely as any other major economy to experience a financial crisis in the coming years.

The bank points to the country's notoriously high levels of debt as the reason for this.

Chief economist for Asia Pacific Michael Spencer does note however, that the risks are low compared to "some countries prior to the peripheral European debt crisis or the Asian financial crisis in the late 1990s."

LONDON - The probability of a financial crisis starting in China is almost twice as high as in any other major global economy, according to new research from analysts at Deutsche Bank.

Writing in a note titled "How much risk in China?" — Deutsche Bank's chief economist for the Asia Pacific region, Dr Michael Spencer, warned that the probability of a crisis in the world's second largest economy was as much as 13%.

That, Spencer said, is "nearly twice the probability of a crisis in the next riskiest country and nearly three times the probability of a crisis in any random country at any random point in time."

Like the majority of discussions around a potential financial crisis in China, Deutsche Bank's concerns centre around the huge levels of indebtedness in the country, which have soared in conjunction with the rapid expansion of the Chinese economy in the last few decades.

"Since 2008, the level of debt owed by Chinese non-financial corporations, households and governments has risen by more than 100% of GDP. As the debt burden has grown, so has concern about financial stability," Spencer wrote.

"The stock of debt owed by all non-financial borrowers rose by 36% of GDP in 2009 alone. An easy monetary policy stance since 2013 has seen indebtedness rise steadily, with total nonfinancial sector borrowing reaching 255% of GDP at the end of last year. And with each step higher in the credit/GDP ratio, investor concerns have risen," he continued.

Now, China may be the major economy at the greatest threat of a financial crisis, but Spencer noted that the likelihood of a crisis "is well below the probabilities calculated for some countries prior to the peripheral European debt crisis or the Asian financial crisis in the late 1990s."

Deutsche Bank

That's largely down to the significant current account surplus China's government continues to run, which provides a large amount of protection against any crisis.

"The current account surplus does, according to our estimates, play an important role in reducing the risk of a crisis in China," Spencer wrote.

"Had the current account been a deficit of 2% of GDP last year rather than a surplus of nearly 2%, the probability of a crisis would have been 7% higher."

While he is relatively sanguine about China, Spencer's warnings do echo the thoughts of the International Monetary Fund, which has warned on numerous occassions about the threats China's ballooning debt poses not only to its own economy, but also the global financial system.

The report, released after the fund's annual fact-finding mission to the world's second largest economy, noted that while China's political classes have taken steps to try and prevent debt levels getting out of control and improve overall financial stability in recent years, more still must be done.

"Credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25% above the long-term trend, very high by international standards and consistent with a high probability of financial distress.